Risk comes from not knowing what you are doing and not having the ability to control the situation when things get out of hand.

Saturday, November 24, 2012

Blindfolded

I have so many comments on my previous post thanks to Coconut and others who shared their thoughts and experiences, of course, I am still trying to figure out what make him tick with such confidence in his trading. Yes, look at the rear mirror, always be cautious of what's behind you and side mirror too, for the blind spot, be prepared just in case.

So, I would like to share further on this topic, looking at the rear mirror after an accident.

The father of my son's classmate is a private banker with a foreign bank. At one of the function, I had a chance to chat with this very successful banker. That was sometime in 2009 after the Lehman crisis where the whole world stock market crashed, very gloomy everywhere and possible collapse of the world financial system. Of course, I dare not tell him it's all because of some greedy bankers.

He told me the crisis whack many of his clients, many lost up to 90% of their capital, from $10 million worth to just $1 million, and all these clients are knowledgeable and smart, obviously or else they won't be so rich.

One of the reason why they lost so much money is because they are too smart, using a very simple investment strategy, by just following what our best fund managers in the two biggest sovereign wealth funds here are doing. How wrong can the best fund managers in the industry be? It's easy to make money, no brainer. They blindfolded themselves and drive along.

So they bought into the 2 biggest, best well managed Banks in the World, Citibank and Merrill Lynch with decades of enviable track record. Any objection at that time before Lehman crisis? These are among the best stocks you can have in your investment portfolio, safe and sound. They loaded up on these 2 stocks by following big brothers.

When there was a cash call in the mist of the Lehman crisis, they followed too by borrowing more from the bank to leverage, no choice or else they would be diluted. They forgotten all about risk and money management. These 2 banks are too big to fail, the US government will bail them out, but the question is when? The crisis deepened and the share prices tank with short sellers taking advantage and those who are long on margin, forced to cut their positions.

The rest is history.

Don't drive blindfolded.

At this point, I would like to introduce www.robertchuablog.com, written by a fellow floor trader, a very consistent trader who taught me about market correlationship when I went back to the arcade in 2008. He was magnanimous in willing to share that strategy at a time when I was lost in the wilderness. It was a very simple strategy but somehow or rather, it was a spark that brighten me up with confidence for the next few years. Though it doesn't work all the time now because the HFTs would be right in front of us with their speed, I am grateful to him for giving me that little lift.

He can express pretty well and do follow his journey in Forex trading.

please don't mistaken i am successful and wealthy, i'm not, just manage to feed my family with a roof and a little spare. like many s'porean, an average guy or may be just a little better with no retirement worry (i'd long since retired haha)

I think trading everyday is consider as working hard, it's your job and you get to enjoy it, that's the difference. You treat it as a challenge and get satisfaction out of it, I am sure 90% of the traders envy what you are doing! That includes me, hahaha.

yes, i can sit here for hours after hours looking at price movement but i try to limit to s'pore trading hours since i'm trading stocks now. but my cnbc never stop broadcast even over night while i sleep, really!

the most enjoying part in my trading, since i'm a position trader now, is the orders been hit! the more the merrier, its a bit like selling your goods if you are a salesman.

and ofcos now that i can scream through the internet with my thoughts, its fun too. what i wrote is what you get, nothing more nothing less, no other motives what so ever, just a "scream".

so having that extreme example, one has to find the optimium point (position size not too big not too small) to gives you the best results and still can sleep quiet well after considering the risk you are holding through open positions (usually these can be quiet nutral if you hedge or even unhedge under normal condition), the comms, the profit, the market condition, your speed of execution and monitoring....

the more you can up your edge (yes you can change them through trading activities), the better your results be consistant.

you have to have a very high confident that your trading edge is above 50%, otherwise, the more you trade, the more down side there is.

i have confident my edge is above 50%, no real proof, just confident, 51%? 52, 53, 54, 55, 56, 57% i don't know, but if i up my trading volume based on what i think the optimum size is, i know my edge will go up as well.

bare in mind that the % above are just assumption based on win/loss ratio of 1 to 1. in actual trading, unless you so design it, can never be fix.

in my case of win/loss ration, becos i employed both counter trend and trend following, the win/loss ratio is never fix, it range from positive to negatives but most of the time, i let the market decide where is the "optimum" ratio or should i say, the ratio will only be know after each individual trades depends on which trade you offset with.

I am too used to having an edge of 70% and above and now we have the human Algos like Coconut who is willing to take a bet even if he has a 0.5% edge, no wonder scalpers find it so difficult to make money, it's just too competitive.

Maybe I should just go scalp the stock market, hahaha. Just joking, there is no more meat left for the short term traders.

haha, when i first blog i actually use HFT for myself cos i didn't know what it refer to haha, now i know.

0.5% is too low, just for illustration, it has to be higher or else not worth the effort.

there is no way to determine the exact edge (or ratio) cos there is no cross reference to each trade and their quantity could be different, may be there is but i just see the equity movement (up and down) and the number of trades to guage and i have a very rough idea.

still think of scalping haha, i don't quite get the meaning of "no more meat left", if the market moves, there will be meat what? isn't it not even for the short term traders? if the market don't move, my position stay as it is, no harm done.? i only worry the market moves too fast for me to react.

but i do have some trades that you call scretch trade where you enter and exit the same price level (or very close to), they are all neccessary trades usually happen during a wile swing price movement in an attempt to hedge or unhedge.

but as long as you think you have a slight edge, all you have to work out is the numbers (just like the casinos), 70% is just too high and unachievable in electronic trading. no way!

hey don't blame me for not taking the other 5,10% of the signals, sometime, with guts feel and the market movement, you just simply know that the market is going to move in a certain direction and why not wait for a better fill?

i know its difficult to make money trading, depends on many factor of that individual but as far as trading system/method is concerned, is it difficult to draw it out based on certain understanding or believes?

trust me, all the methods there is are all available and widely used, there are many very smart people who are currently using and trading them, especially the big institutions.

i'm not afraid of them as you rightly said, they are too greedy and use too much leverage probably due to they are not trading their own money or only partially.

so what is the understanding and believes?

in a nut shell, you have to be able to do what the market does, at least most of the time, to cover as much as you could and not what you can do.

when the market is ranging, you have to (try) have a system to capture it, when its trending you have to (try) capture it as well. in another words, you have to be able to perform in both market condition and any other unforeseen surprises, no heshitation (most of the time)

you can't profit both at the same time cos they are the opposite and not compatable but when you draw the best and the worst out of it, the result can be net gain.

ofcos unless you don't believes both method can work.

and you know what, after you had done this basic strcuture, what follows are simply to add new things onto it which ever you think more benefitial, you evolve from that system and you can easily change it to suit current market condition without major changes to the basic structure.

i know many people are curious to know what numbers are we talking about, you say you trade for a living, so whats the number? whats the return?

currently i trade (stocks) a lot smaller then before, cutting my position size less then half and my net open positions (net exposure) is even smaller (i used to have a larger long position).

i'm not trying to boost but gives a rough guide line as to a 300+k margin accounts, how would the returns be. compare to others. remember this account is for margin only and i used it almost to the max, i have other accounts where currently not active.

since i re-start my trading in april, the total profit (equity is at the highest point now) is around 90,000. that works out to be around 10k/month, its not a great number but thats how it is currently. (i had a 18k lost in october which should be able to avoid it)

usually when i trade i really don't look at that equity number display going up and down in real time, i don't care, i know where it should be. i just focus on my trades.

i'm contented with my current trading even though my profit is smaller but i wanted to keep my funds dry for unexpected event, you never know when its going to come.

don't "celebrate" too soon haha, i had been quite discipline, almost like an "algo" machine comes to executions haha. almost never look at the current price when i entered, i feel quiet dumb sometimes.

wait til i think i'm smart again then thing will start to be different, most likely will get worst.

after reading robert chua's blog about risking 2% on each trade which make sense if you are not a "HFT" trader, i'm contemplating whats the risk i'm taking on each of my trades based on minimum position size?

the answer is 0.07%!!! (based on margin account not total amount i have), ofcos, i use a spread that is the norm which largely signals are generated.

thats how small it is and i still think its a little too big haha (just kidding).

that also allows me to average losses without fear as long as the market is cum. if not, i still can hedge it, no problem.

if my system wants me to trade a hundred times over in a day, i will do it with many thanks.

trade small my friend, until you have no feel in each individual trade.

600k is a pretty huge sum to lose, plus the time and effort, probably you can afford because you made big in 08/09, that's definitely not for me, no way and imagine to take years to recover under current condition.

in 09/09/10, i was thinking like 25-30%? that will make me a multi-m in a few years and that is what i told my wife we were heading haha (knn).

now, no target, not yet i guess. or never will be i don't know.

i got to get back my trading first, having a target actually heart me more, i try not to think of it, really.

with my worksheet i still can handle, don't really trust computers and can be very dangerous when system breaks down. after all it more fun to do it manually especially when you think you know something new. the worst thing is to shut my brain down haha.

Wah Fatkor you make me shy lah. I have to say that you are the one who catch on fast. I keep telling the rest that you auto pilot after 1day :) nia. Also not forgetting you helped sponsor me when I started off as a 'local'. That cannot thanks you enough.

ok, this post for you KAW, kind of conclusion about trading or my learning about my trading.

the different between the man and the boys (farmer).

first look at my trading record this year, assuming its true, looking from an experience trader point of view, what's so special?

its really nothing! mind you again that its a 300k account and i fully utilise the margin, maybe half for open position and half for entry for new positions. do the maths and you will know that to double the account size in a year is not uncommon in professional trading. i'm far from it.

i'm just a farmer (the boy) going about farming and manage just to survive, my bread and butter.

when i first saw fat posting his little small account (i think was about 30k) and his performance every single day, i say to myself, what? a professional trader?

but from the way he speaks i knew he knew a lot but why so small?

and times go by, little by little his account go up, nothing special, enough to drink a cup of coffee.

and 1 fine ordinary day, something extraordinary happen, something happen and the future drop by 10 big point, the one lot trader suddently was trying to place an order 20/30 lots in one go and only managed to get like 12 or 15 lots, he almost double his money and he is still feeling soar.

after that incident, my respect double as well. and this is really what differeniate between the man from the boys.

regardless of how big one is trading, the ability to see the opportunity and most of all, have the guts to step up and go for the kill, thats professional trading.

Because you still have plenty of cash idling, so should put some effort into investing, less stressful, less comm.

Many of the stocks I am holding are more than 10 years, never get out at the high nor add on even in the Lehman crisis, feel that I have neglected this part of the investment. My mind just can't multi-task while trading short term in the futures, this is part of my failure.

by the way, today the trading volume is very high and the general market is very strong, even though i did put out shorts but i keep my spread/ hedge tide, meaning will cover my shorts faster given a slight chance.

SGX says no to High Frequency TradingBy Patrick Fok | Posted: 29 November 2012 2343 hrs"The Singapore Exchange has said that it will not introduce High Frequency Trading (HFT) for equities until adequate system controls are in-place."So we can still enjoy the ride while it last...

So SGX delay introducing HFT for the equitites market but comm still damn high for short term scalping unless you are a prop trader with a brokering house where there is no comm except SGX clearing fee and don't know what the hell trading fee plus 7% GST.

another one (thats KAW) always look for bargains haha. KAW, if you want cheap CFDs go to IG market.

may be or most likely its me that is having problem. i never like to bargain, very unlike a trader who always want a good deal. ofcos i want a good deal, but i just don't like the bargaining (and the sourcing) part.

if i want to buy something in a shopping center, 5 to 10 minutes is all i need whereas my wife will take 5 hours.

Haha coconut...u got me wrong this time. I was only referring to FAT being kind of unfairly treated as he has decades of relationship with the house.I am a small fry in comparison and I am still working within the retail rates, I just price it in.

Thanks for the heads up in IG Market, coconut. Fortunately or unfortunately I have another remisier also a member of AFACT waiting to sign me up despite me telling him I am a small timer. :( But I have to tell him to be patience till my other friend is up and running or throw in the towel...guess its a rather competitive world for them too just like everywhere else.

You can blog as much as you want here, it doesn't cost me a cent! Calculative right? But when I don't reply that mean that I am out of the house having coffee with some of my friends. So you might feel a bit lonely.

Ya, market was so bullish, but you have the guts, you the can! You should join as a prop trader with one of the broking firm, but have to share 50% of your profit with them, while the losses are all yours. But no comm. so you can trade even more.

Your old knife still sharp, mine already blunt, so it's going to be different way of trading.

I had a friend who did very well as a prop trader, but unfortunately he did something against the law and now out of the financial line. He did what some of the Algos are doing now which the regulators are unable to nap.